On price caps under uncertainty

Robert Earle*, Karl H Schmedders, Tymon Tatur

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

21 Scopus citations

Abstract

This paper shows how standard arguments supporting the imposition of price caps break down in the presence of demand uncertainty. In particular, though in the deterministic case the introduction or lowering of a price cap (above marginal cost) results in increased production, increased total welfare, decreased prices, and increased consumer welfare, we show that all of the above comparative statics predictions fail for generic uncertain demand functions. For example, for price caps sufficiently close to marginal cost, a decrease in the price cap always leads to a decrease in production and total welfare under certain mild conditions. Under stronger regularity assumptions, all of the monotone comparative statics predictions from the deterministic case also do not hold for a generic uncertain demand if we restrict attention to price caps in an arbitrary fixed interval (as long as the price caps are binding for some values in that interval).

Original languageEnglish (US)
Pages (from-to)93-111
Number of pages19
JournalReview of Economic Studies
Volume74
Issue number1
DOIs
StatePublished - Jan 1 2007

ASJC Scopus subject areas

  • Economics and Econometrics

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